Sri Lanka's Debt Crisis: Japan, India To Lead Restructuring Meeting

Japan is all set to lead a meeting of creditor nations to promote debt restructuring in Sri Lanka.

Japan, India, France and other creditors are expected to reveal a plan on Thursday (13 April). China, Sri Lanka's primary lender, will also be included.

It could set a model for resolving debt issues of middle-income nations, worsened by increased interest rates in the US and Europe.

Japan's Finance Minister and top officials from India and France will attend the first event, while Sri Lanka's President will participate virtually.

The International Monetary Fund (IMF), World Bank, private sector and other organizations will join debt restructuring discussions. Parties involved will coordinate the timing of the first meeting.

The pandemic crippled Sri Lanka's tourism industry, causing a significant drop in income. The country became unable to repay infrastructure loans it had taken from China and other countries, leading to a default in May.

As of June, China had 52 per cent of Sri Lanka's bilateral debt, followed by Japan at 20 per cent, India at 12 per cent, and France at 3 per cent.

China has been hesitant to alleviate Sri Lanka's debt, causing a setback in debt restructuring. Nevertheless, China provided reassurances in March to resolve the debt treatment for Sri Lanka, enabling the island to receive a vital $2.9 billion rescue package from the IMF in the following months.

China's participation in multilateral discussions is currently the centre of attention.

The G20 in 2020, introduced a framework aimed at resolving emerging economies' debt crisis. The IMF and other organizations can grant low-income countries partial debt forgiveness, though it excludes other nations.

Emerging economies are struggling with rising prices due to pandemic impacts and Russia's invasion of Ukraine, leading to increased external debt. The World Bank reports that by the end of 2021, external debt in these economies had doubled from a decade earlier to $9 trillion.

Sri Lanka has become the first middle-income country to default since the coronavirus outbreak, indicating the spread of the debt crisis beyond low-income countries.

However, if the new framework resolves the default, it may set an example for future debt restructuring.